On January 7, 2013, the HHS OIG released Advisory Opinion 12-22 concerning a rural hospital's (Hospital) proposal to pay a cardiology group (Group) a performance bonus for achieving certain patient service, quality and cost savings measures for procedures performed at the Hospital's cardiac catheterization laboratories (Lab). The opinion analyzed the arrangement under the civil monetary penalty provision (CMP) relating to reductions or limitations of services provided to Medicare and Medicaid beneficiaries and the federal anti-kickback statute. The CMP, which has heretofore been neglected by providers and regulators alike, provides for a penalty against any hospital that knowingly makes a payment directly or indirectly to a physician as an inducement to reduce or limit services provided to Medicare or Medicaid beneficiaries under the physician's direct care. The physician to whom the improper payment is paid also may be subject to the penalty. An important distinction is that the CMP does not require that the payment reduce or limit medically necessary care; rather, the law is violated if the payment induces the reduction or limitation of any services.

The Hospital proposed to enter into a three-year co-management agreement with the Group to provide management services to the Hospital, including oversight of Lab operations, strategic planning and medical direction services, development of the Hospital's cardiology program, participation on medical staff committees, staff development and training, recommending Lab equipment, medical devices and supplies and providing assistance with financial and payor issues, among other duties. In exchange for these services, the Hospital would pay the Group a fixed fee and the Group would be eligible for a performance fee not to exceed the fixed fee based on four components: employee satisfaction, patient satisfaction with the Labs, improved quality of care in the Labs and implementation of cost savings measures in the Labs. The Group would distribute the performance fee to its shareholders on a pro rata basis according to each physician's ownership rather than the physician's participation in the arrangement with Hospital.

At the outset, the OIG identified a laundry list of concerns in such arrangements, including: "(i) stinting on patient care, (ii) "cherry picking" healthy patients and steering sicker (and more costly) patients to hospitals that do not offer such arrangements, (iii) payments to induce patient referrals, and (iv) unfair competition among hospitals offering incentive compensation programs to foster physician loyalty and to attract more referrals." Nevertheless, in the heavily footnoted opinion, the OIG determined that it would not seek sanctions against the Hospital for the proposed arrangement under the CMP or anti-kickback statute. With respect to sanctions under the CMP, the OIG recognized that the cost savings component of the performance fee might induce physicians to alter their current medical practice by reducing or limiting services; however, the OIG was satisfied with the safeguards built in to the proposal. In making this determination, the OIG relied on many of the Hospital's factual certifications, which included that the arrangement would be monitored from a patient care and operational perspective by both internal and external independent entities. The OIG also noted the continued access of physicians to any device and supply they deem is most appropriate for each patient and the performance fee amount being based on the Group's aggregate performance rather than the cost of specific patient cases.

The opinion also approved of the proposal under the federal anti-kickback statute. The OIG's conclusion was based upon the Hospital's certification that a third-party evaluator determined that both the fixed fee and performance fee reflect fair market value for the substantial services provided by the Group under the management agreement. Additionally, because the compensation under the proposal would not vary with the number of patients treated by the Group at the Hospital and the Hospital operates the only cardiac catheterization labs in a fifty-mile radius, the OIG concluded that the compensation would be unlikely to influence the physicians' referral decisions. Finally, the OIG was persuaded that the specificity of the agreement provisions relating to the performance fee components indicates that the purpose of the arrangement is to improve quality rather than reward physician referrals.

The opinion offers a glimpse into the OIG's complex view of the increasingly popular pay-for-performance compensation arrangements and establishes general guidelines for providers to consider when entering into such arrangements. However, the OIG has made it clear with this opinion that pay-for-performance arrangements need to represent real efforts to achieve quality improvement measurements rather than simply influence physician referrals, and include safeguards against patient care rationing, to avoid liability under the CMP and anti-kickback statute. Additionally, such arrangements also are likely to implicate the physician self-referral law (Stark Law). Therefore, providers contemplating such arrangements should undertake a similar analysis with respect to compliance with an available exception to the Stark Law.

If you have any questions or need assistance with evaluating a pay-for-performance arrangement, please contact Donna S. Clark, dclark@bakerlaw.com or 713.646.1302, or Darby C. Allen, dallen@bakerlaw.com or 713.646.1311.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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